Yesterday the IMF said the world is in for an "unusually long and severe" recession, with a "sluggish" recovery – but it is possible that "the worst of the recession may well be behind us", as declared by the latest recruit to the Bank of England's Monetary Policy Committee, David Miles.
The pace of decline in many sectors is easing; they are still losing output, but the steepness of the decline is lessening, and they may soon "bottom out". That does not mean they are set to soar soon after, but the most intense pain may have passed. Or, as President Obama put it at the beginning of the week: "By no means are we out of the woods just yet. But from where we stand, for the very first time, we are beginning to see glimmers of hope." The chairman of the US Federal Reserve, Ben Bernanke, added: "Recently we have seen tentative signs that the sharp decline in economic activity may be slowing."
The cash cavalry is coming
One reason for thinking the recession may ease sooner than expected is the scale of stimulus being applied in virtually every major economy – about $2trn of fiscal boost globally, plus a total of $1.1trn in stand-by and other funding for the IMF. Official interest rates throughout the West are near zero, and governments are "printing money" to inject cash directly into the economy, like an adrenalin jab.
Here, the Bank of England's £75bn programme of "quantitative easing", meaning an increase in the quantity of money in bank accounts, is only £26bn through its course. The Government's lending agreements with major banks will add an extra £90bn in lending over the next two years.
Mr Miles said: "If you look at the Government's announcement on fiscal policy, the bringing forward of next year's spending to this year and the cut in VAT – it has only begun to have an impact within the last few months. Economic history teaches us that a combination of tax cuts, running large fiscal deficits, substantial cuts in interests rates and more quantitative easing is likely, with a certain time lag, to have a substantial impact on demand in the economy and it may well be that the worst of the recession may well be behind us."
The stock market leads the way
Crispin Odey, one of the hedge fund managers who became famous last year for shorting the UK banks, is the latest guru to turn bullish. And stock market legend Anthony Bolton of Fidelity Investments was even more prescient, saying last autumn that he was starting to buy back into equities, and he has repeated that view. The FTSE 100 Index is back over the 4,000 mark, up 500 points on its nadir in early March. However, that has to be placed against its recent peak of 6,732, registered in June 2007.
To buy or not to buy
House prices usually follow the path of mortgage approvals after a six-month gap, because the main spur to rising demand in the property market is the flow of funds to new buyers. Recent statistics from the Bank of England and the Council of Mortgage Lenders suggested that mortgage approvals are creeping up, although levels are still two-thirds lower than they were pre-crunch. They could easily bump along around their current level of 36,000 a month for some time, leaving house prices stagnant rather than rising rapidly. The main dampener in the housing market and the economy generally will be unemployment, traditionally one of the last things to recover, as employers can increase output without hiring new staff. Few doubt that joblessness will hit 3 million this time next year.
The managers have the answer
One of the most obscure yet reliable ways to read the future of the economy is to watch the polls of business sentiment. The Chartered Institute of Purchasing & Supply's survey has a fairly uncanny ability to "predict" GDP, with a lag of about three months. The latest data suggest some stabilisation. Crucially the "inventory recession" seems to be wearing off – that is shops selling from stock rather than sending orders to the factory, a process that exaggerates the fall in demand the further back in the supply chain you go.
Let history judge
The IMF's World Economic Outlook suggests that a combination of the credit crunch and globalisation means that this downturn will be more synchronised and more severe: "This combination is historically rare." Most forecasters believe that the UK economy will shrink badly in 2009, be roughly at a standstill in 2010, and grow weakly in 2011. They don't see a recovery until 2012 – and even then a very weak one. The conclusion would appear to be that we shouldn't worry about the recession as much as the recovery, likely to be held back as consumers, banks and governments try to pay off their vast new debts. These green shoots may grow into rather sickly plants.
Reading the data: The key indicators
Mortgage approvals
These usually indicate what will happen to house prices within about six months. There has been a slight increase of late but they remain at very low levels and could drop again.
Business sentiment
Surveys of managers about order books, pricing and recruiting intentions are a good "leading indicator" of the state of the economy in about three months' time. Near record lows but some signs of stabilisation.
Market interest rates
The credit crunch meant banks wouldn't lend to each other, or anyone else, except at exorbitant interest rates. That has eased but they are still high by historic standards.
The stock market
With a very unpredictable and variable lag, this usually points to a rise in profits by companies and a wider economic recovery a year or two out. Has seen a modest rally in recent months.
HM Treasury forecasts
These have usually been pretty good on the general economic outlook, but have proved very unreliable since the recession began.
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